Final answer:
Withdrawals from Bill's IRA will be taxed as ordinary income. As it is a traditional IRA, the growth was tax-deferred and taxes apply upon withdrawal. Potential early withdrawal penalties can be avoided under certain conditions.
Step-by-step explanation:
After performing a direct rollover from a qualified stock bonus plan to an IRA, Bill will be subject to specific tax rules upon making withdrawals from the IRA. The correct choice is (b) withdrawals will only be taxed as ordinary income. Since the funds in a traditional IRA have not been taxed and have grown tax-deferred, withdrawals will be included in Bill's taxable income for the year they are taken. This means that these withdrawals will be taxed at his ordinary income tax rate. It's important to note that Bill is 57, which is under the age of 59 and a half, normally leading to a 10% early withdrawal penalty. However, since he has moved his funds via a direct rollover, and if his withdrawals meet certain conditions such as being part of substantially equal periodic payments (SEPP), he may be able to avoid the 10% penalty.
A common confusion arises between traditional IRA and Roth IRA tax treatments. With a Roth IRA, contributions are made with after-tax dollars, resulting in tax-free withdrawals on both the contributions and earnings, provided certain conditions are met. In contrast, traditional IRAs provide a tax-deferred growth, delaying taxes until the funds are withdrawn in retirement. Consequently, this question does not pertain to the Roth IRA but to the traditional IRA.